Economics Writer for The Sydney Morning Herald. Jessica’s first book Zombies, Bananas and Why There Are No Economists in Heaven is available as an ebook and in hard copy

I like old people. Some of my favourite people in the world are, on any independent measure, old. Society benefits little from the so-called ''generational wars'' that artificially pit young against old. Young people are invariably portrayed as selfish and greedy. Old people as hard-working contributors to society and pillars of the community.

But Australia's tax system is hopelessly skewed against the young in favour of the old.

Young people really do get a bad rap. Is there any more maligned group of people than Generation X and Y? (I'm on the cusp.) We're flighty. We change jobs too often. We move house. We rent. We won't settle down. We won't get married and provide those longed-for grandchildren. We are only interested in ourselves. We play computer games all day.

But consider, just for a moment, the view from the other side of the fence. Young people have watched helplessly as the generations before them have been showered with one-off senior's payments, family payments, baby bonuses, tax-exemptions on family homes and superannuation tax breaks.

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We've also watched as house prices skyrocketed, meaning we can't afford to buy homes - or if we can, only under the weight of crippling mortgages.

We started our working lives burdened by HECS debts that add between 4 and 8 percentage points to our marginal tax rates.

The trade-off for younger generations was always the assumption that we'd earn our government entitlements when we had children, bought a house and sprouted grey hairs. The bonuses, the tax breaks and exemptions would be ours, too.

But with wafer-thin budget surpluses and an ageing population, it is increasingly clear the largesse of the past few decades cannot be sustained. The jig is up and young people will have to make do without the government help afforded to previous generations. By compulsion, they'll have more super when they retire but they'll be less likely to own their homes outright. They will be called upon to pay the income taxes needed to fund the needs of an ageing population and there will be fewer of them to do it.

Just so we're clear, it's not old people's fault. Politicians just happened to do the numbers and decide the children of the Great Depression and their baby boomer offspring were significant voting constituencies.

Older Australians have no doubt worked hard and made sacrifices to build a good portion of the wealth now stored in their family home. But, it should be recognised, they have also made a killing thanks to house price inflation. And now it appears the government wants them to live in those half-empty three-bedroom houses for the rest of their lives.

Last Friday's aged care announcement - the most sweeping reforms to aged care in 30 years - means more older Australians will be paying more out of their pocket for care. But one sacred cow remains - the family home.

According to the Minister for Ageing, Mark Butler, the ''primary objective is to support older Australians staying in their own home for as long as possible and, if at all possible, for the whole of their lives''.

Retirees won't be forced into a fire sale of the family home to fund care. The government has rejected a Productivity Commission proposal for a public home equity withdrawal scheme, so that elderly people won't be encouraged to tap into the wealth in their home to fund their care. And, of course, the family home will remain exempt from the means test for their pension.

From the perspective of the young, who in increasing numbers will never own the home of their dreams outright, the idea of older Australians being entitled to live out their days in their family home carries a special sting.

If the aim is to keep people out of institutionalised care and in private accommodation for as long as possible, great. But encouraging older Australians to rattle around in three or four-bedroom houses no longer suited to their needs helps no one.

A study by the Australian Housing and Urban Research Institute released in May 2010, How well do older Australians utilise their homes?, found 84 per cent of homes occupied by people aged 55 or older are under-used (having one or more spare bedrooms).

While older people view such spare rooms as necessary, for hobbies and when grandchildren come to stay, arguably a more efficient allocation of housing would help relieve upward pressure on house prices.

Policymakers should continue to look at ways to remove the barriers to older Australians downsizing.

Providing a mix of housing in communities, freestanding homes and higher-density developments, means that old and young people can move in and out of age-appropriate housing without leaving their communities.

Stamp duty concessions for older people downsizing would also remove a barrier to downsizing. A land tax, applied on a square-metre basis, would penalise old and young for under-using space.

The phenomenon of children resisting the sale of the family home to unlock funds for a parent's retirement, so that the children can inherit the wealth tax-free - otherwise known as the ''nailing granny to the floor'' phenomenon - must also be addressed, possibly through an inheritance tax on housing.

It is true that many young people stand to inherit great wealth in the form of housing. But they'll do so not because of their labours, or their ability to reinvest it productively, but pure dumb luck as to who their parents are.

Using the family home as a tax shelter only increases intra-generational inequality. It's time for a serious look at how we house not just older Australians but younger ones, throughout the life cycle. The decisions we make today about the shape of our tax system, particularly as it applies to housing, will influence life for generations to come. So far, we're making a hash of it and younger generations will pay.

75 comments

Loved the bit about "nailing granny to the floor".

Inheritance tax is one that should never have been abolished. Perhaps the wealth tied up in the family home could be used to defray home-care costs as well - if they choose to stay at home, then they should pay for their care with a reverse-mortgage or somesuch.

Commenter

BillR

Date and time

April 25, 2012, 8:09AM

Inheritance tax is ridiculous (much like capital gains).

Its double dipping to tax your income and then tax the profit you make from that same income if you choose to invest. Double dipping at its worse.

Commenter

Harry

Location

Newcastle

Date and time

April 25, 2012, 12:23PM

Harry, that's bunk. Inheritance tax is about dampening intergenerational inequity; it also permits lower taxes on income and purchases. It's not levied on ordinary homes either. Like the CGT it mostly taxes speculative gains, not real income.

Commenter

Graeme

Date and time

April 25, 2012, 12:57PM

@Harry "it permits lower taxes on income.." The key work there is permits - not guarantees. Sounds very much like Howard's famous "petrol prices need not rise" statement. In reality, we would be taxed twice.

Commenter

g

Location

Bris

Date and time

April 25, 2012, 1:52PM

Current policies create over investment in housing. We have small families with big mortgages then adding on more rooms, then intend using their super to pay off their debt. WIth the tax payer funding their retirement, and McMansion. We should have land tax, super contributions should be taxed out of after tax dollars and lump sum withdrawals of super should be banned and Housing should be asset tested for the pension. This regime then forces people to think twice about spending money on overcapitalising their home. They would then invest more in income producing assets, thus reducing pressure on the age pension system especially when the number of taxpayers as a ratio to pensioners will halve in future years.

Commenter

CJ

Location

Sydney

Date and time

April 25, 2012, 8:11AM

You obviously don't own any property or have any investments or your attitude would be different towards taxation. Why would anyone in their right mind contribute extra money to super if it was taxed at the same rate as their income? Super locks away your money for years and is hardly a good investment without the tax breaks, You'd be better off putting your money in a high interest savings acount.

Commenter

Batty

Location

Syd

Date and time

April 25, 2012, 12:34PM

Jessica is right to an extent, but apparently hasn't researched the details. We are a retired couple living in a 5 bedroom home and decided to downsize. Unfortunately, there are very few smaller houses being built to move into, and even then they are very expensive being mostly built by builders looking to make a profit, entirely reasonable from their perspective. I looked into building a new home, but after estimating the costs of selling, moving, buying land, building a smaller house, doing the modest landscaping, and the many small fitouts like shelves, picture hooks, etc, I realised that we would be out of pocket. The other obvious problem is that to finance the new building, we would either have to sell our existing home first and then rent, or attempt to get a mortgage on our present home, very difficult when you are on a pension.Good ideas, Jessica, in principle, but like most recent projects of our Federal Government, short on detail and impractical in the real world.

Commenter

Wayne

Date and time

April 25, 2012, 8:12AM

If your 5 bedroom house was means tested for the pension, and you were forced to take a reverse mortgage and no pension was allowed, how would this impact your assessment to stay or move ?

Commenter

CJ76

Date and time

April 25, 2012, 11:55AM

I don't know. Generation Y is constantly told that we want it all now and we're too greedy and selfish to settle for less. Why do 2 of you need a house? What's wrong with a townhouse? Or a place 2 and a half hours out of the city? It's not like you have a job to travel to. Oh, did you want to live within 60km of your family?....It's it's fine for the goose...

Commenter

Kate

Date and time

April 25, 2012, 12:05PM

I don't need a 5 bedroom house, but living in the Central West of NSW, where do I find a townhouse or a smaller house that moving would not have me out of pocket? My pension is self-funded, so there is no issue of means testing or any other government support. The problem with ideology is that it is a "one size fits all", and takes no account of individual circumstances or locations. Those who live in cities all their lives have little understanding of circumstances in country towns. It is a pity that people like CJ76 and Kate are mean-spirited and make unfounded accusations regarding my circumstances without any appreciation of the reality. The simple fact is that my wife and I are self-supporting and have attempted to downsize, but to do so would mean moving yet again, and being out of pocket. Why would we do that?